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Price explosions in the construction industry due to the attack on Ukraine

  • Germany
  • Other

12-04-2022

How contracts with public clients can be adapted

Background

For a large number of construction materials, the invasion of Ukraine and the subsequent sanctions have led to extreme supply bottle-necks and thus also to an unprecedented price explosion.

In particular, companies already under con-tract are currently facing the problem that certain materials can no longer be procured at all or can be procured at a multiple of the originally estimated price. They are simply no longer able to meet their contractual obliga-tions or can only do so by accepting high losses in many cases.

This applies not only to companies that con-tract with private entities, but also in particu-lar to those that have won a public tender and now have to deliver but cannot.

Even if the contracting authority as well as the contractual partner is willing to adapt the con¬tract, the question arises on both sides as to the legal implications for doing so.

Reaction of Public Authorities

The Federal Ministry of Housing, Urban Devel-opment and Construction (BMI) has recog-nized this emergency situation and on March 25, 2022, issued a decree (Ref.: BWI7-70437/9#4) that contains a recommendation for action for public-sector clients.

It is currently becoming apparent that this decree will also be adopted at state levels. In a letter dated April 1, 2022, the responsible ministry in North Rhine-Westphalia has already declared it will also apply the BMI decree in the state's municipal sector. We expect that other federal states will follow suit.

The aim is to adapt the contracts to the new situation and avoid a new invitation to tender.

1. Applicability of the Regulations

There are a number of items affected by recent price hikes. The BMI decree of March 25, 2022 therefore applies to the following range of materials and products:

  • Steel and steel alloys
  • Aluminium
  • Copper
  • Petroleum products (bitumen, plastic pipes, foils, sealing membranes and asphalt mixtures)
  • Epoxy resins
  • Cement products
  • Wood
  • Cast iron pipes.

It comes into effect immediately and is valid until June 30, 2022.

2. Future Award Procedures

In case of new award procedures, material price escalator clauses shall be inserted for the materials and products mentioned under No 1.

This renders the price variable to the extent that changes in the price of the certain materi¬als and products affect the total price to a specified extent. In this respect, it is elemen¬tary to contractually stipulate a starting price, a price index and the point in time at which a price fluctuation is taken into account.

In the absence of a corresponding clause, it is essential to work towards the inclusion of a material price escalation clause by means of a formal bidder inquiry.

3. Current Award Procedures

In all award procedures in which the bids have not yet been opened, the above-mentioned material price escalator clauses should be inserted retrospectively. Procedures in which the offers have already been opened should be reset.

4. Concluded Contracts

The most complicated case is certainly the adjustment of contracts that have concluded since before the war but have not yet been settled. Those must always be considered on a case-by-case basis.

If possible, material price escalation clauses should also be inserted here at a later date. However, this then only applies to materials and products supplied in the future.

If materials and products can demonstrably not to be procured at all, an extension of the contract term pursuant to § 6 para. 2 no. 1 lit. c) VOB/B may be considered.

A change to the contract via § 58 BHO can also be considered in exceptional cases.

In most cases, however, companies will be able to invoke an adjustment of the contract due to a disruption of the basis of contract pursuant to § 313 BGB.

Until now, case law has been very reluctant to affirm the disruption of the basis of business due to price increases. However, there has been no comparable situation to date. Even during the steel crisis in the early 2000s, price increases were not as unpredictable and extreme as they are at present. Thus, the BMI considers the requirements of disturbance of the basis of business to be fulfilled.

The invasion of Ukraine and the subsequent sanctions against Belarus and Russia represent an event that was unforeseeable. This also applies to the subsequent price explosion.

Thus, an adjustment of the contracts via § 313 BGB seems possible.

In this context, it is problematic whether the change is substantial and, as such, pursuant to § 132 GWB, leads to a new award proce-dure having to be carried out.

The BMI denies this with a reference to § 132 (1) No. 2 analogously and (2) No. 3 GWB. At any rate, we also consider the latter standard to be pertinent.

It should be borne in mind, however, that an amendment is only possible if it corresponds to less than 50 percent of the original order volume and the amendment of the contract may be published in the Official Journal of the European Union.

Conclusion

BMI has recognized that the current situation requires special measures. The decree repre¬sents a good recommendation for action for public contracting authorities, which will hope¬fully soon be followed at state level.

It now remains to be seen whether case law will confirm this view. However, we believe that the chances of this happening are very good.

Companies that find themselves in a situation such as this should definitely request a con¬tract adjustment from the contracting author¬ity. Without a corresponding request, no con¬tract adjustment will take place.